S-Space College of Business Administration/Business School (경영대학/대학원) Dept. of Business Administration (경영학과) Seoul Journal of Business (SJB) Seoul Journal of Business Volume 15, Number 1/2 (2009)
Dual Time Series of Annual Earnings Based on the Direction of Sales Changes
- HWANG, INY
- Issue Date
- Seoul Journal of Business, Vol.15 No.2, pp. 3-23
- earnings response coefficient ; sales changes ; earnings growth ; earnings persistency ; sticky cost
- This study characterizes annual earnings as a mixture of two random-walk processes along two states of sales change, sales-increase and sales-decrease, thereby providing new insights into the earnings response coefficient (ERC). The dual earnings process is based on the premise that sales changes in the opposite direction convey different information about firms future cash flows or earnings. Building on the extant ERC models, this study shows that the ERC is significantly larger in sales-increase periods than in sales-decrease periods and its magnitude increases as firms experience the increase of sales in multiple consecutive years.